Market Could Be Ready For A Bounce

The markets are down again in early trading, and getting a bit oversold.  The Dow has been down for six straight days and the markets could be due for a short-term bounce.

The news today is more of the same.  The concerns out of Greece now focus around the prospect that they will not get another bailout and will actually exit the euro.  This was the story that was making the rounds yesterday, and the manager of one of the largest currency hedge funds said he tough it was likely to occur this summer.

Earnings reactions have been a mixed bag lately. 

• Stocks rising on earnings reports today include: DIS, DF, EZCH, and SODA. 
• Stocks falling on earnings include: M, FCN, AGU, TEVA

The dollar continues to bounce vs. the euro, which is hurting commodities.  Oil prices have been down below the $96 level today, while gold slips further below the $1600 level to $1587.

Asian markets were down across the board overnight.  The flight-to-safety trade is only occurring in Treasuries, which is pushing the yield on the 10-year down to 1.81%.

As for the VIX, it has broken out to new highs today above the 21 level but looks poised to reverse.  I still expect the VIX to pull back from these levels in the near-term, but if we get a deeper correction down the road it still has plenty of room to run.  Remember last summer the VIX spiked as high as 48.

Trading comment: The Dow has been down for six straight days, and the S&P 500 is basically the same.  The SPX has now pulled back more than 5% from its April highs.  That is pretty much an intermediate correction and I wouldn't be surprised to see a bounce in the near-term.  Also, yesterday I mentioned the March lows at SPX 1340 as next support.  The SPX touched 1343 this morning, which is close enough for govt. work.  As such, I am covering some of our hedges and decreasing our short exposure in anticipation of a bounce.  I think it is likely to just be an oversold bounce, so I plan to add back to our hedges from higher levels.

KAM Advisors has long positions in EFZ, SH

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Are The Wheels Coming Off In Greece?

The markets are down sharply this morning, in what looks like continuation selling from last week's selloff.  Yesterday's action appears like a brief reprieve at the moment. 

The news washing up on our shores from Europe centers around the political turmoil in Greece again.  A new leftist leader is making some threatening comments that not only should Greece not accept any more bailout money but they should not ratify and even renege on the last 2 bailout deals they made.  His comments would seem to pave the way for Greece exiting the euro at some point.  Greece's stock market has plunged in recent days.

In earnings news, today's big disappointment comes from retailer Fossil (FOSL).  FOSL management lowered guidance and made some very negative comments about the picture in Europe.  FOSL stock is getting crushed by nearly -40% today, and it is weighing heavily on a host of other high end retail and apparel stocks.

Overnight action in Asia was mixed.  The dollar is getting a boost today, while commodities are lower again.  Oil prices have pulled back to $95.50 while gold prices are down all the way back near the $1600 level.  One silver lining would be if gas prices at the pump fell which would be a boost to the consumer ahead of summer.

The 10-year yield is fading further, now down to a yield of 1.82%.  As for the VIX, it is up more than 10% so far breaking above the $20 level and testing the April highs near 21.

Trading comment: The S&P 500 has broken the near-term support levels traders have been watching near the 1360 level.  It is currently trading near 1350.  I would say the next support area comes into play near the March lows at 1340.  Yesterday I cautioned that the recent price action meant the market has more work to do before this correction fully plays out.  But corrections are part of the investment landscape, so one should learn from their previous mistakes and try not to repeat them.  Stay defensive, raise cash to levels that you can sleep comfortably at night, and start making a list of stocks that are holding up well or are poised to rally when the selling looks exhausted.

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How Deep Will The Correction Be?

The markets are slightly lower in early trading, although the Nazz is trying to buck the early weakness and go positive as I write.

The news over the weekend mostly centered around elections in Europe.  In France, the Socialist candidate  (Hollande) was elected over incumbent Sarkozy.  And in Greece the elections also point to a political shakeup.  So especially in France investors worry that the austerity plans in the eurozone could be in jeopardy, and the Franco-German leadership will likely lose one of its key leaders.

Overnight action in Asia was lower across the board, with Japan and Hong Kong down more than -2.5% each. 

The dollar is higher today, which is also weighing on commodities.  Oil prices are lower near $96.60 and gold prices are lower to $1634.

On the earnings front, this morning's big disappointment comes from a stock we really like, CTSH.  The company beat estimates but lowered revenue guidance for FY12 and the stock is getting killed.  I think this is an overreaction, and will likely present a good buying opportunity when the dust settles.

The 10-year yield continues to languish and is trading at 1.86%.  This is about a 3-month low.  As for the VIX, it is up fractionally and nearly reached the 20 level this morning before pulling back a bit.  The 20 level has pretty much acted as resistance since mid-January of this year.

Trading comment: Back-to-back higher volume selloffs on Thursday and Friday lend themselves to the notion that the market is still in correction mode.  The SPX and Nasdaq both broke back below their 50-day support levels.  When the SPX broke back above its 50-day in late April, I commented that the rally was on light volume and most market leaders were still in corrections.  As such I felt that the market would remain choppy and it was not the time to rush back into buying mode.  I think that was the right call, as last week's market action looks like it means this correction has more work to do-- both in time and price. 

At SPX 1370, the market is roughly 3.6% lower from its April highs.  A 5% correction would take the S&P down to 1350, while an 8% correction would bring the 1300 level into focus.  I think investors should be patient and wait for the market to mend itself.  Watch your individual stocks.  Some of them will begin to act positive again and break out ahead of the market.  Others could lag.  We will try to protect recent profits, stay defensive, and hold higher cash balances in the interim.

KAM Advisors has long positions in CTSH

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Scheduling Conflict

I will be out of the office the remainder of the week.  Please check back on Monday for our regular updates.

Thanks--

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Shiller Backs Away From 'Late Great Depression' Remark

After declaring that the world was in a state of “late Great Depression” on Tuesday, renowned Yale economist Robert Shiller hedged his words.


“Did I say that? Well, I think there are a lot of analogies to what we’ve been going through to that of the Great Depression, but I don’t really think we’re in a depression, so I might have said it slightly wrong,” he said in an interview on CNBC’s “The Kudlow Report.”

Shiller, co-developer of the Case-Shiller index on housing trends and author of “Finance and the Great Society,” said that while the United States wasn’t in a recession, certain elements of the economy resembled one.

“The persistence of high unemployment is a problem,” he said, along with interest rates at “Depression levels.”

On Monday, Shiller told “Squawk Box Europe” that the world was in a “new age of austerity.”

“Our whole economy has been affected by variations in confidence. Central banks are sort of trusted, but the actions they have often affect people’s confidence by appearance rather than substance. We’re not in the most trusting mood now,” he said in that interview.

Asked by host Larry Kudlow on Tuesday about whether the economy was in a recovery, Shiller said “not quite”.

“Depends on how you define these things. In some ways, we are not in a recovery. Look at the employment-population ratio. It’s stuck at 58.5 percent. That’s kind of close to the lowest it’s been in this whole debacle,” he said. “We haven’t recovered jobs. Unemployment rate is down, but that is because people have left the labor force.”

Shiller also reiterated his support for government stimulus.

“I’ve been advocating raising taxes and expenditures as a temporary measure to get us out of the weak economy. That’s the balanced budget multiplier first proposed by William Salant and Paul Samuelson in the 1940s,” he said. “Now’s the time to use it.”

Challenged on the idea that President Obama’s stimulus hasn't worked, Shiller defended the idea.

“We’ve had a worse recession than anybody expected. I don’t think it proves that the principle is wrong. I think we need to do that,” he said. “We can’t give up on the economy.”

“There’s no impact on the natural debt,” he added.

Shiller also said he believed in market forces.

“I would like to see financial markets expanded,” he said, adding that he had faith that the stock market was still a good bet.

Asked to weigh in on Jeremy Siegel’s prediction that the Dow Jones Industrial Average would hit 17,000 by the end of 2013, Shiller took a more modest outlook.

“I agree with him that stocks are a good investment,” he said. “I’m just not as high and gung-ho as Jeremy is.”

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1st Day Of The Month Effect

The market is nicely higher in early trading.  There was a strong manufacturing report this morning which helped boost the market, the strong reactions to earnings reports were also helping.  Does it feel like the first day of the month is always an up day in the market?

In economic news, the latest ISM Manufacturing index came in above expectations at 54.8, which is higher than the 53.4 reading last month.

In earnings news, I am seeing more stocks going up after reporting than falling.  Here are some examples:

Stocks rising on earnings reports:

• ADM, APC, MPC, CCJ, ECL, IPGP, HCP, FWLT, MAS

Stocks rising on earnings reports:

• BP, CMI, DPZ, AVP, VPHM

Many foreign markets were closed for holidays overnight, but in Asia Japan was open and suffered a -1.8 loss.  In Europe, the UK is higher despite a weaker than expected PMI manufacturing report.  China's official PMI rose to 53.3, which puts it at the highest level in a year.  But as I have been saying, the govt. PMI figure is consistently higher than the private sector HSBC PMI data.

The dollar is slightly higher, and commodities are mixed.  Oil prices are above the $106 level, while gold prices are a tad weaker near $1663.

The 10-year yield is getting a boost today to 1.95%; and the VIX is down -4.6% to 16.35.

Trading comment: The market continues to act well technically.  We'll have to see if today's early rally lasts into the close and if is accompanied by any volume to speak of.  The S&P mid-cap 400 index is very near breaking to new highs again.  I had expected the market to remain in a trading range for a bit longer, which is still possible.  But remember the old saying that you have to accept the market as it is, and not how you wish it to be. 

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Political Marketing 101?

Having checked that it was not from the candidate's opponents, I had to wonder if this personalised marketing was an example of subtlety or incompetence. Marketing may often engender indifference, but it always has an impact.

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